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Twin Falls NSC, LLC v. Southern Idaho Ambulatory Surgery Center, LLC

United States District Court, D. Idaho

September 23, 2019

TWIN FALLS NSC, LLC, a Tennessee limited liability company, Plaintiff/Counter-defendant,
v.
SOUTHERN IDAHO AMBULATORY SURGERY CENTER, LLC, an Idaho limited liability company, Defendant/Counter-claimant.

          MEMORANDUM DECISION AND ORDER

          David C. Nye, Chief U.S. District Court Judge

         I. INTRODUCTION

         Plaintiff/Counter-defendant Twin Falls NSC, LLC (“Twin Falls”) filed a Complaint and Application to confirm a final arbitration award (Dkt. 1) issued in an arbitration with Defendant Southern Idaho Ambulatory Surgery Center, LLC (“Sawtooth”). The arbitration award became final on January 7, 2019. Sawtooth filed a Counter-Petition to vacate the arbitration award (Dkt. 8), alleging the arbitrator refused to provide Sawtooth with access to critical evidence, refused to consider dispositive evidence submitted by Sawtooth during the arbitration proceedings, and committed manifest disregard of the law. In the alternative, Sawtooth suggests the Court must remand to the arbitrator for clarification and modification because the arbitration award is incomplete, ambiguous and contradictory. Twin Falls thereafter filed a Motion to Confirm the arbitration award (Dkt. 12) and a Motion to Dismiss Sawtooth’s Counter-Petition (Dkt. 13). Sawtooth responded with its own Motion to Vacate/Modify the arbitration award (Dkt. 22). The Court held oral argument on the motions on July 18, 2019.

         Because Sawtooth fails to satisfy the extremely narrow circumstances under which a final arbitration award can be vacated or remanded under the Federal Arbitration Act, 9 U.S.C. §§ 10 and 11 (“FAA”), the Court GRANTS Twin Falls’ Motion to Confirm Arbitration Award (Dkt. 12), DENIES Sawtooth’s Motion to Vacate and/or Modify Arbitration Award (Dkt. 22), and MOOTS Twin Falls’ Motion to Dismiss. (Dkt. 13).

         II. FACTS

         On June 27, 2018, Sawtooth initiated an arbitration proceeding with the American Arbitration Association (“AAA”) against Twin Falls by filing an arbitration demand. Sawtooth asserted claims for breach of contract, breach of fiduciary duty, declaratory judgment, intentional interference with prospective economic advantage, negligent interference with prospective economic advantage, negligent misrepresentation, unjust enrichment, fraud, failure to turn over corporate records, and an accounting. The parties were required to arbitrate their disputes pursuant to the “Second Amended and Restated Operating Agreement of Southern Idaho Ambulatory Surgery Center” (hereinafter “Operating Agreement”). Dkt. 1, Ex. 4. On July 3, 2018, Twin Falls filed its Answer, along with a counterclaim for breach of contract against Sawtooth.

         On July 17, 2018, the AAA appointed former Arizona Superior Court Judge Rebecca A. Albrecht as arbitrator in the matter (hereinafter the “Arbitrator”). Pursuant to the expedited schedule provided in the Operating Agreement, and after a prehearing conference with the Arbitrator on June 20, 2018, the parties agreed to submit dispositive motions by August 15, 2018. Dkt. 1, Ex. 7. On August 28, 2018, the Arbitrator granted summary judgment in favor of Twin Falls on Sawtooth’s claims for declaratory judgment, intentional interference with prospective economic advantage, negligent interference with prospective economic advantage, negligent misrepresentation, unjust enrichment and fraud.

         An arbitration hearing was held on September 7-8, 2018, in Twin Falls, Idaho. On September 7, 2018, after the close of Sawtooth’s proof at the hearing, the Arbitrator granted a directed verdict in favor of Twin Falls on Sawtooth’s claims for breach of fiduciary duty, the demand for turnover of corporate records, and the demand for an accounting. Following the hearing, both parties submitted post-hearing briefs on October 17, 2018. On November 9, 2018, the Arbitrator entered an Interim Award, finding in favor of Twin Falls on its counterclaim for breach of contract. The Arbitrator held that Sawtooth was liable to Twin Falls in the amount of $236, 830 for breach of contract and awarded judgment in favor of Twin Falls on Sawtooth’s remaining claims. Pursuant to the Operating Agreement, the Arbitrator also awarded Twin Falls its attorneys’ fees and costs. Dkt. 1, Ex. 4, at § 21.11.

         Following submission of Twin Falls’ fees and costs and Sawtooth’s objection thereto, the Arbitrator confirmed the Interim Award and entered a Final Award and Award of Attorneys’ Fees and Costs on January 7, 2019 (“Final Award”). In addition to $236, 830 in damages for Sawtooth’s breach of contract, the Final Award granted Twin Falls their total requested attorneys’ fees and costs in the amount of $976, 207.74, as well as $17, 008.49 for Twin Falls’ share of the AAA expenses. The Interim Award and Final Award are referred to collectively hereinafter as the “Arbitration Award.” Pursuant to 9 U.S.C. § 9 and Idaho Code section 7-911, Twin Falls filed the instant action to confirm the Arbitration Award on January 9, 2019.

         Although the aforementioned facts are those relevant to the instant suit, a brief summary of the underlying dispute provides necessary context for Sawtooth’s attempt to vacate the Arbitration Award. Sawtooth is an ambulatory surgery center founded in 1998 by a small group of surgeons in Twin Falls, Idaho. As Sawtooth grew, the prospect of large-scale funding and national resources motivated a partnership with a company called National Surgical Corporation (“NSC”). NSC acquired a fifty-one percent (51%) ownership interest in Sawtooth, assumed the position of Managing Member of Sawtooth, and held its interest through special purpose entity Twin Falls. The Operating Agreement set out the rights and duties of the Managing Member and the non-Managing Members of Sawtooth.

         Between 2007 and 2011, Sawtooth flourished under the management of NSC. However, in late 2011, NSC sold its interest in Twin Falls to AmSurg Holdings (“AmSurg”). Twin Falls, under its new ownership, served as the Managing Member of Sawtooth between September 1, 2011, and December 26, 2017. Twin Falls succeeded to broad managerial powers and control of Sawtooth under the Operating Agreement, which remained unaltered during the AmSurg acquisition. In exchange, Twin Falls received a monthly “Management Fee” equal to seven-percent (7%) of Sawtooth’s net receipts.[1]

         Sawtooth became dissatisfied with Twin Falls’ management almost immediately.

         Over the next six years, the relationship between the parties continued to deteriorate. Although it recounts a number of Twin Falls’ purported failures, Sawtooth was particularly frustrated by Twin Falls’ management of Sawtooth’s ophthalmology practice group (“Ophthalmology Group”), concerned about Twin Falls’ lack of strategic planning and recruitment, and disenfranchised by Twin Falls’ purported acts of interference with Sawtooth’s physicians and revenue-generating activities by competitor St. Luke’s Medical Group, Ltd. (“St. Luke’s”). Dkt. 8, ¶ 22.

         Beginning in 2012, Sawtooth’s Ophthalmology Group began criticizing the compensation paid to Twin Falls as disproportionate to the value Twin Falls contributed to Sawtooth’s business. In 2013, the Ophthalmology Group expressed a desire to potentially withdraw from Sawtooth’s membership and move their surgical caseload to another surgical center. Twin Falls negotiated with the Ophthalmology Group for more than a year. The Ophthalmology Group’s main concerns were its percentage of ownership, the management fee paid to Twin Falls, and the long-term viability of Sawtooth given competition from St. Luke’s. Despite lengthy discussions, the Ophthalmology Group ultimately decided to leave Sawtooth, and subsequently sold their membership units to remaining non-Managing members of Sawtooth.

         Over the following two years, the Ophthalmology Group reduced its caseload but continued to perform procedures at Sawtooth until it had satisfied its noncompetition obligations. Once such obligations were satisfied, the Ophthalmology Group cut all ties with Sawtooth. Sawtooth suggests Twin Falls made no efforts to recruit surgeons to replace the income it knew would be lost at the end of the noncompetition period and instead chose to “reap the Ophthalmology Group’s revenue during the period they were bound by the non-competition obligation.” Dkt. 8, ¶ 29. As a result, Sawtooth suggests Twin Falls “forfeited rights against physicians whose membership obligations would have yielded approximately $15, 000, 000 in projected gross earnings.” Id. at 30.

         Sawtooth also claims Twin Falls did nothing to prevent or remedy interference with its operations by St. Luke’s, including the health system’s purported coercion of Sawtooth’s non-Managing Members and non-Member physicians. In particular, Sawtooth claims one of Sawtooth’s founding Members, Dr. Blake Johnson, moved his entire surgical practice to St. Luke’s new surgery center in late 2016. Sawtooth alleges Twin Falls failed to take legally required action to divest Dr. Johnson of his membership interest in Sawtooth, failed to enforce Dr. Johnson’s noncompetition obligations, and failed to take action to stop member compensation from being paid to Dr. Johnson.

         After “intense discussions” between Sawtooth’s non-Managing Members and Twin Falls regarding the future of the surgery center, Twin Falls ultimately withdrew as Managing Member on December 26, 2017. Dkt. 8, ¶ 41. The Operating Agreement required that if “the Non-Managing Members elect timely to reconstitute and continue the Company” following the withdrawal of the Managing Member, “the Company shall purchase the Units of the Managing Member for cash[.]” Dkt. 1, Ex. 4, at § 16.2. After Twin Falls withdrew, Sawtooth continued the company and elected member Dr. Peter Doble (“Dr. Doble”) as its Managing Member. Twin Falls’ breach of contract counterclaim was for Sawtooth’s failure to buy Twin Falls’ units following Twin Falls’ withdrawal. The parties stipulated at the arbitration hearing that damages related to Sawtooth’s failure to pay Twin Falls for its ownership interest after the withdrawal amounted to $236, 830.00. The Arbitrator found in favor of Twin Falls on its breach of contract counterclaim and awarded Twin Falls the aforementioned amount following the arbitration.

         III. LEGAL STANDARD

         Under 9 U.S.C. § 10 of the Federal Arbitration Act (“FAA”), a United States district court may vacate an arbitration award “only in very unusual circumstances.First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 942 (1995). Limited judicial review of arbitration awards “maintain[s] arbitration’s essential virtue of resolving disputes straightaway.” Hall Street Assoc., LLC v. Mattel, Inc., 552 U.S. 576, 588 (2008). If parties could take “full-bore legal and evidentiary appeals, ” arbitration would become “merely a prelude to a more cumbersome and time-consuming judicial review process.” Id. (internal quotation marks and citations omitted). The party seeking to vacate the arbitration award thus bears the burden for establishing grounds to do so. U.S. Life Ins. Co. v. Superior Nat’l Ins. Co., 591 F.3d 1167, 1173 (9th Cir. 2010).

         Pursuant to 9 U.S.C. § 10(a), a court may vacate an arbitration award if: (1) the award was procured by corruption, fraud or undue means; (2) there was evident partiality or corruption in the arbitrators; (3) the arbitrators were guilty of misconduct in refusing to postpone the hearing, refusing to hear evidence pertinent and material to the controversy, or any other misbehavior by which the rights of a party were prejudiced; or (4) where the arbitrators exceed their powers, or so imperfectly executed them that “a mutual, final, and definite award upon the subject matter submitted was not made.” 9 U.S.C. § 10(a).

         The Court’s responsibility upon review of an arbitration award is to ensure that the FAA’s due process protections were afforded. U.S. Life Ins. Co, 591 F.3d at 1173. The Court is not to impose federal procedural and evidentiary requirements upon the arbitration hearing. Id. at 1172. Nor may the Court “reconsider the merits of [a party’s] substantive legal arguments.” Sandru v. TD Ameritrade, Inc., 2015 WL 5611571, at *3 (D. Idaho 2015) (citing Biller v. Toyota Motor Corp., 668 F.3d 655, 664 (9th Cir. 2012)). Confirmation is required even in the face of “erroneous findings of fact or misinterpretations of law.” Am. Postal Workers Union, AFL-CIO v. United States Postal Serv., 682 F.2d 1280, 1285 (9th Cir. 1982). As such, the scope of review is “both limited and highly deferential.” PowerAgent, Inc. v. Elec. Data Sys. Co., 358 F.3d 1187, 1193 (9th Cir. 2004).

         If vacatur is not warranted, section 11 of the FAA allows a court to modify or correct an award: where there was an evident material miscalculation of figures or an evident material mistake in the description of any person, thing, or property referred to in the award; where the arbitrators have awarded upon a matter not submitted to them, unless it is a matter not affecting the merits of the decision upon the matter submitted; or where the award is imperfect in matter of form not affecting the merits of the controversy. 9 U.S.C. § 11. Like § 10, erroneous findings of fact or misinterpretations of the law are not grounds for modification or correction of an award under § 11. San Martine Compania De Navegacion, S.A. v. Saguenay Terminals Ltd., 293 F.2d 796, 800 (9th Cir. 1961).

         IV. ANALYSIS

         A. Vacatur Pursuant to 9 U.S.C. § 10

         Sawtooth seeks to vacate the Arbitration Award because the Arbitrator committed misconduct and because the Arbitration Award “is so fundamentally flawed in its manifest disregard of the law that it cannot be construed as final, mutual and definite.” Dkt. 22-1, at 7-8.

         1. Misconduct by the Arbitrator

         The FAA permits vacatur where “the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or any other misbehavior by which the rights of any party have been prejudiced.” 9 U.S.C. § 10(a)(3). Sawtooth suggests the Arbitrator committed misconduct by denying its motions to compel, failing to postpone or extend the hearing, excluding testimony from Sawtooth’s non-retained experts, and disregarding Sawtooth’s evidence.

         a. Denial of Sawtooth’s Motions to Compel

         Sawtooth first suggests vacatur is appropriate because the Arbitrator improperly restricted Sawtooth’s access to essential discovery by denying Sawtooth’s Motion to Compel Twin Falls to produce supplemental responses to specific interrogatories and requests for production of documents. Dkt. 22-1, at 7; Dkt. 8, at ¶¶ 84-88. Sawtooth also challenges the Arbitrator’s denial of Sawtooth’s Motion to Compel further deposition testimony from Justin Page, Twin Falls’ Federal Rule of Civil Procedure 30(b)(6) designee. Dkt. 8, at ¶¶ 89-95.

         Unless a discovery mandate is found in a statute, contract provision, or the adopted rules, a party to arbitration has no legal right to prehearing discovery. Burton v. Bush, 614 F.2d 389, 390 (4th Cir. 1980). Here, the Operating Agreement allowed for limited discovery, including a brief discovery period concluding 30 days after filing of the demand for arbitration, no more than 20 hours of depositions, production of responsive documents, and identification of individuals with knowledge of the dispute. Dkt. 1, Ex. 4, at § 21.9. While the parties engaged in such discovery, Sawtooth faults the Arbitrator for failing to compel supplemental discovery when Twin Falls’ discovery responses and 30(b)(6) deponent purportedly fell short. Dkt. 8, ¶¶ 84-95.

         A denial of discovery is not a basis for vacatur under the FAA. Hyatt Franchising, LLC v. Shen Zhen New World I, LLC, 876 F.3d 900, 902 (7th Cir. 2017); Bain Cotton Co. v. Chesnutt Cotton Co., 531 Fed.Appx. 500, 501 (5th Cir. 2013) (“Regardless [of] whether the district court. . . might disagree with the arbitrator[’s] handling of [a party’s] discovery requests, that handling does not rise to the level required for vacating under any of the FAA’s narrow and exclusive grounds.”). Although Sawtooth alleges the Arbitrator’s discovery rulings warrant vacatur under 9 U.S.C. § 10(a)(3) because a judge may set aside an arbitrator’s award where the arbitrator “refuses to hear evidence pertinent and material to the controversy, ” the statutory phrase “refusing to hear evidence” concerns the conduct of the hearing, not the conduct of discovery. Hyatt, 876 F.3d at 901. Notably, “avoiding the expense of discovery under the Federal Rules of Civil Procedure and their state-law equivalents is among the principal reasons why people agree to arbitrate.” Id. That Twin Falls’ attorneys’ fees in the arbitration proceeding approached $1 million shows that “plenty of discovery occurred” and an argument that the Arbitrator “should have allowed more rings hollow.” Id.

         Further, to vacate an arbitration award on the ground of arbitrator misconduct, the misconduct must amount to a denial of fundamental fairness of the arbitration proceeding. Roche v. Local 32B-32J Service Employees Intern. Union, 755 F.Supp. 622, 624 (S.D.N.Y. 1991). “In handling evidence an arbitrator need not follow all the niceties observed by the federal courts. He need only grant the parties a fundamentally fair hearing.” Bell Aerospace Co. Div. of Textron, Inc. v. Local 516, 500 F.2d 921, 923 (2d Cir. 1974). Here the process the Arbitrator employed ensured due process by permitting the discovery outlined in the Operating Agreement, allowing each of the parties an adequate opportunity to present their evidence and arguments with respect to the Motions to Compel, and entering written orders denying both motions. Immersion Corp. v. Sony Comput. Entm’t Am. LLC, 188 F.Supp. 3d 960, 975 (N.D. Cal. 2016). Arbitrators “enjoy ‘wide discretion to require ...


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